Gust Of Activity Puts Wind ETFs In Focus

by on December 10, 2010 | ETFs Mentioned:

Alternative energy has been a hot topic in recent years, as some have argued for aggressive adoption while others deem the policies and practices too expensive and feel that the world should let the market sort through the various ideas until a more cost-efficient way to implement the various clean energy methods presents itself. Earlier in 2010, when the Deepwater Horizon rig exploded in the Gulf of Mexico, alternative energy was pushed back into the public eye, as the U.S. endured one of the worst environmental disasters in its history. But as the spill was cleaned up and oil prices trended lower, the push for more alternative energy subsided, at least in the eyes of the general public. Yet, behind the scenes, a number of alternative energy firms continue the push to implement more eco-friendly energy production methods [see also Rare Earth Metal Shortage Could Sink These Three ETFs].

Over the years, one of the most prevalent forms of alternative energy has come from wind-powered devices, thanks in part to the relative safety and easy-to-understand methodology of these strategies. Moreover, the turbines for wind power are capable of generating massive amounts of power and can be deployed virtually anywhere in the world. From a global perspective, the U.S. falls behind in wind energy output but has big plans to catch up to the rest of the world. Currently, there are no offshore wind turbines in the US, but a number of states along the Atlantic are making a major push with a slew of  proposals awaiting government approval [see also Earth Day Special: Definitive Guide To Clean Energy ETFs].

Up to 6 gigawatt worth of projects have been proposed along the Atlantic coast, and approximately 3GW are advancing through the permit process. “It clearly establishes the momentum that has been created to build offshore wind farms in the Atlantic” said Curtis Fisher, co-author of the report outlining the projects along our eastern coastline. And still, the 6GW proposal barely scratches the surface of the potential 212GW worth of opportunities in shallow waters, as identified by the U.S. government. As a reference point, one gigawatt of energy is equal to one billion watts. According to a 2007 report form the U.S. Energy Information Administration, the average home uses 11,232 kilowatt hours of energy on an annual basis, though estimates vary across the board. This means that one gigawatt is enough energy to power roughly 90,000 homes for a year, and the proposed 6GW will be able to power around half a million homes. And as for the potential 212GW in our shallow seas, that would provide energy for almost 19 million homes across the country for an entire year [see also Friday The 13th Special: Three Unlucky ETFs].

Future Tailwinds

While wind energy is ramping up in the U.S., a number of other nations are making heavy pushes to increase the number of turbines in operation as well. The European Wind Energy Association aims to have 40GW of off-shore turbines in operation by 2020, with an impressive 150GW in 2030. Meanwhile, China’s target is 30GW by 2020, dwarfing the American proposals of 10GW by 2020 and 54GW by 2030. The only thing standing in the way for a surge in U.S. development is the lengthy permit process to actually build the turbines. “The permitting of the Cape Wind project – the first offshore wind farm in the US – took nine years,” writes Gloria Gonzalez. If the U.S. can find a way to shorten the permit process, then there could be a significant increase in project approvals, possibly creating a bull market for wind power firms.

Back in October, a major announcement came from an unlikely firm that will boost the efforts to start a major Atlantic turbine field. Search engine giant Google announced plans to buy a 37.5% stake in a $5 billion dollar project that would put a 350-mile network of power lines in place. The lines will run along the Atlantic coast, stretching from New Jersey to Virginia and the project could help to spur wind power development by decreasing risk. The project is “critical to more rapidly scaling up offshore wind because without it, offshore wind developers would be forced to build individual radial transmission lines from each offshore wind project to the shore, requiring additional time consuming permitting and environmental studies and making balancing the grid more difficult,” said Rick Needham, the Green Business Operations Director for Google [see Alternative Energy ETFs In Focus: Google Bets On Wind Power].

With the future wind energy outlook increasing in nations across the world, and news of a power line that could make a drastic difference in U.S. offshore energy, wind-based companies may be poised to surge. Below we outline two wind ETFs to take advantage of this growing alternative energy option.

First Trust ISE Global Wind Energy ETF (FAN)

This ETF tracks the ISE Global Wind Energy Index, investing in the wind energy industry all over the world. The fund’s top two holdings include Iberdrola Energias Renovables SA (7.9%), and EDP Renovaveis SA (7.7%). Iderdrola operates wind turbines in a number of countries that add up to a cumulative 11,000 megawatts. EDP Renovaveis (known as Horizon Wind Energy in the States) operates 2,800MW of wind energy in the U.S. alone. A UBS report recently upgraded both of these firms from “neutral” to “buy” status. In terms of country exposure, FAN devotes a majority of its assets to Europe, with the U.S. accounting for 15% of the fund.

PowerShares Global Wind Energy Portfolio (PWND)

PWND seeks to replicate the performance of the NASDAQ OMX Clean Edge Global Wind Energy Index, which is designed to measure the performance of global companies engaged in the wind energy industry. PWND’s top two holdings mimic that of FAN, but the two ETFs differ when it comes to the remaining holdings [see PWND's holdings here]. This ETF tends to focus more internationally than does FAN, but the U.S. still makes up 10% of the fund. However, this heavy international focus could give investors great exposure to many of the countries that will be big players in the wind industry in the coming years, especially if some of the most recent proposals take off around the world [see Wind ETFs Head-To-Head: PWND vs. FAN].

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Disclosure: Photo courtesy of Hans Hillewaert. No positions at time of writing.